WMT Black Book
We are hosting our Walmart presentation at 12:30 ET today CLICK HERE for the webcast and materials.
After two negative guidance revisions, Walmart’s estimates appear to be inflecting positively. The consensus EPS estimates for Q3 reflect a more significant deceleration in sales trends and headwinds from markdowns than our model.
Walmart is the fifth largest holding in the Consumer Staples XLP ETF, so many analysts must consciously decide whether to be underweight or overweight. We think now is the time to be overweight Walmart.
Walmart’s competitive dynamics have implications for numerous competitors as well as the supply chain. As the largest food retailer, its promotional intensity can set the pace for the industry. As the largest customer for numerous CPG companies, its pricing plans can have an outsized influence on margin trends.
The investment themes for our call:
Higher warehouse club fees (WMT, COST, BJ)
Sam’s Club is raising its annual membership fee to $50 from $45 for club members and to $110 from $100 for higher-tier memberships. Sam’s last increased its club fee nine years ago and it has never raised the higher-tier membership since it was introduced in 1999. Sam’s Club said it would reimburse the increase in the fee this year for members in Sam’s cash that can be used in stores. Costco’s membership fees are $60 and $120 respectively. Costco last raised its fee in 2017. BJ’s Wholesale Club’s fees are $55 and $110 respectively. Costco is due for a fee increase in 2023, but like Sam’s Club it likely wants to move carefully with the consumer headwinds. With the current double-digit inflation rate consumers can make back their membership fee even quicker.
Return to the office (KR)
According to Kastle Office Systems, the average office occupancy rate of its top ten cities in the U.S. was 43% for the week ended August 24, down 50bps from the prior week. Door swipes measured by Kastle peaked below 45% in July. Goldman Sachs announced this week that it was lifting all COVID protocols and all employees are expected to return to the office five days a week after Labor Day. Occupancy levels will likely increase post-Labor day, but reaching 50% would be an achievement at this point. Time will tell if a loosening job market and similar requirements by other employers will meaningfully increase office occupancy levels. Other employers may realize more flexible schedules can offset lower compensation. It may be time to call it a permanent shift in at-home food consumption.
Last mile cash burn (WMT)
The Wall Street Journal reported that Gopuff is seeking to borrow up to $300M as a cash cushion. Gopuff had planned on an IPO this year, but has put it off due to market conditions. Last year the company raised more than $2B, valuing the company at $15B. The article said Gopuff had about $1.5B in cash after a cash burn of $400M in the first quarter. Gopuffs orders YTD through August 15 were up 45% from the prior year. It is difficult to make delivery work without the sale. WMT and AMZN have large moats here.
